ACCA Paper P2 (INT) Corporate Reporting Pocket notes - Kaplan 2010
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Foreign currency
Foreign currency Chapter 3
kaplanpublishing 33
Exam focus
• Inanexamquestionthecalculationof
the exchange gains and losses is by far
the most difficult aspect.
• Inpastpapersthishasbeenworthvery
few marks.
• Thebestplanistoignoreitandgainthe
marks elsewhere.
Set out your workings in columns as follows:
Steps:
1 Make any adjustments to the subsidiary’s
accounts in the foreign currency.
2 Translate the subsidiary’s financial
statements – statement of financial
position at closing rate and income
statement at average rate.
3 Do the consolidation workings as normal.
4 Prepare the consolidated income
statement and statement of financial
position – don’t forget the adjustment
for the gain or loss on the parent’s
investment in the subsidiary.
Since IAS 21 requires the cost of investment
within the goodwill calculation to be based
on the closing rate, an extra adjustment is
required as part of the consolidation process.
The cost of investment held in the parent’s
accounts (recorded at the historic rate)
must be retranslated to the closing rate.
Any exchange gain or loss is taken to group
reserves.
Disposal of overseas subsidiaries
Ondisposalofasubsidiarythathasbeen
translated into presentational currency, the
cumulative exchange differences that have
previously been recognised in reserves
become realised. The foreign exchange
Subsidiary
results
t
Subsidiary
results for
consolidation
$
Revised
results
t
Rate
closing
rate
Adjustments
t
Foreign currency
34 kaplanpublishing
Foreign currency Chapter 3
reserve is taken to the income statement
on the disposal of the subsidiary as part of
the gain or loss on disposal. This is called
recycling of gains and losses.
Equity accounting
The principles to be used in translating a
subsidiary’s financial statements also apply
to the translation of an associate’s.
Oncetheresultsaretranslated,thecarrying
amount of the associate (cost (at the closing
rate) plus the share of post acquisition
retained earnings) can be calculated together
with the group’s share of the profits for the
period and included in the group financial
statements.
Hyperinflation
Definition
• Hyperinflationisdeemedtoexistwhen
the cumulative inflation rate over three
years is approaching or exceeds 100%.
• Suchhighinflationrendersfinancial
information useless unless it is
expressed in terms of current prices.
• Therefore,IAS29requiresthatnon
monetary assets (inventory, investments
and non-current assets) and income
and expenses are restated by applying
the change in the general price index
from the date of the transaction to the
balance sheet date. (If a general price
index is not available then use an
estimate based on the exchange rate
Key Point
Hyperinflation is a very high rate of inflation.
Foreign currency
Foreign currency Chapter 3
kaplanpublishing 35
movements between the functional
currency and a stable currency.)
• Monetaryassetsandliabilitiesarenot
restated as they are already expressed
in terms of amounts owed or owing at
the balance sheet date.
• Correspondingfiguresmustalsobe
restated to improve comparability.
Exam focus
Within EN-gage Complete Text Chapter 5,
attempt TYU 4 Saint & Albans.
Foreign currency may be tested either as a
group accounting question, or as part of a
multi-topic question as follows:
June 2004 - Memo•
December 2006 - Mission•
June 2008 – Ribby, Hall and Zian•
Foreign currency
36 kaplanpublishing
37
Group statement of
cash flows
In this chapter
Overview.•
Format of the statement of cash flows.•
Dividends from associates.•
Dividends paid to non-controlling interest.•
Acquisitions and disposals.•
Foreign currency.•
chapter
4
Chapter 4
Group statement of cash flows
38 kaplanpublishing
Overview
• Astatementofcashflowsenablesusers
of the financial statements to assess the
liquidity, solvency and financial
adaptability of a business.
• Newtopicstodealwithingroupcash
flows are dividends from associates,
dividends to NCI and acquisitions and
disposals.
• Cash flows are inflows and outflows of
cash and cash equivalents.
Key Point
• Cash consists of cash in hand and
deposits repayable upon demand less
overdrafts. This includes cash held in a
foreign currency.
• Cash equivalents are short term, highly
liquid investments that are readily
convertible to known amounts of cash
and are subject to an insignificant risk of
changes in value.
Definition
• Ifrequiredtoprepareastatementof
cashflows, you will be producing a
group cash flow as individual company
cash flows have been covered in earlier
papers.
• Theexaminermayaskyoutocorrect
a cash flow rather than prepare from first
principles. Be ready for this!
Format of the statement of
cash flows
IAS 7 Statement of cash flow does
not prescribe a format for the cash flow
statement, it requires that it is split into three
sections – operating, investing and financing.
Exam focus
Chapter 4
kaplanpublishing 39
DEF Group statement of cash flows for
the year ended 31 December 20X6
$000 $000
Cash flows from operating activities
Profit before tax X
Adjustments for:
Depreciation charge X
Amortisation of goodwill X
Profit on sale of non-current
assets (X)
Interest received (X)
Interest paid X
____
Operatingprofitbefore
working capital changes X
Increase in inventories (X)
Increase in receivables (X)
____
Increase in payables X
Cash generated from operations X
Interest paid (X)
Income tax paid (X)
____
Net cash inflow from operating
activities X
Cash flows from investing activities
Dividends received from
associate X
Interest received X
Purchase of property,
plant and equipment (X)
Proceeds from sale
of property X
Acquisition of subsidiary,
net of cash acquired (X)
____
Net cash used in
investing activities (X)
Group statement of cash flows
Group statement of cash flows
40 kaplanpublishing
Group statement of cash flows Chapter 4
Cash flows from financing activities
Issue of ordinary
share capital X
Repurchase of loan (X)
Dividends paid to minority
interest (X)
Dividends paid to parent
shareholders (X)
_____
Net cash used in
financing activities (X)
_____
Net increase in cash and cash
equivalents X
Cash and cash equivalents
brought forward X
Cash and cash equivalents
_____
carried forward X
_____
Dividends from associates
In the cash flow statement we need to report
the actual cash received by the group from
the associate in the period. To find this, we
reconcile the opening to closing balance of
the investment in associate.
Dividends Paid to Non-
controlling interests
When a subsidiary that is not wholly owned
pays dividends, some of the cash leaves the
group as the dividend paid to the minority
interest. This must be shown in the group
cash flow statement. The working is very
similar to that for the associate (above). The
non-controlling interest is reconciled from
opening to closing balance and the cash paid
is the balancing figure.
Group statement of cash flows
Group statement of cash flows Chapter 4
kaplanpublishing 41
As with the associate, watch out for
dividends payable that mean all of the cash
has not been paid to the NCI. You will need
to adjust the cash paid for the effect of this.
Acquisitions and disposals
If a subsidiary joins or leaves a group
during a financial year, the cash flows of
the group should include the cash flows of
that subsidiary for the period the results of
the subsidiary are included in the income
statement.
The treatment of an acquisition or disposal
of a subsidiary is not difficult. As seen in
the proforma, the acquisition or disposal is
included in investing activities. The figure
shown is the net figure of two items.
• Thecashspentonthepurchaseor
received on the sale of the subsidiary.
• Thecashbalances(oroverdraft).
acquired or disposed of with a subsidiary
(found in the net assets of the subsidiary
at acquisition or disposal).
These two figures can be picked up very
quickly from the question paper.
However, when dealing with the other
balances in the cash flow, you must take
out the effect of the acquisition. So, when
dealing with any of the assets and liabilities
in the cash flow, make sure you take out the
effect of the assets or liabilities on acquisition
or disposal.
Group statement of cash flows
42 kaplanpublishing
Foreign currency
Foreign currency gains and losses are not
cash flows so must not be included in the
statement of cash flows. They will be seen
as a reconciling item when trying to establish
cash movements for items such as non-
current assets, inventories, receivables,
payables in the same way we have just seen
above.
Within EN-gage Complete Text Chapter 6,
attempt TYU 5 Boardres.
Ensure that you are familiar with the
standard workings and adjustments required
for group statements of cash flow.
Recent examination questions include:
Pilot Paper – Zambeze Group•
December 2008 – Warrburt Group.•
Exam focus